'Condoblue' explains: Why I'm walking away

An update this morning from Condoblue. For those of you just joining us, Condoblue is the poster who plans to walk away from a mortage and move into a new home -- even if it means foreclosure. Reaction here was split on whether Blue's decision was a smart business move, or a sign of poor personal character. Condoblue read your comments and responds this morning:

"As the original poster, I'd like to add some facts to the story since there have been so many assumptions made about my situation. Apparently, it hit quite a nerve, judging from the torrent of postings.

"I did not get House #1 with a liar loan; it was fully documented. I could have put money down but chose to hold on to my cash. As it turns out, the value has dropped so much, it would have just been money down the drain anyway. I never planned to flip the place or make a quick buck (although I don't see anything wrong with making money). I just figured I'd sell or refinance it before the ARM readjusted. At the time I was looking, it was one of the cheapest condos I could find in a decent area.

"I don't have a grudge against big companies (hell, I work for one) or feel like I'm 'sticking it to the man.' Like many posters have said, it's just business.

I have a good income, credit, and savings, so am qualified to buy House #2 using my savings as a down payment. I have adequate income to meet the lenders' debt ratios to cover both homes, and then some. Servicing the debt is not an issue. Ironically, House #2 is a short sale.

When I applied for the loan on House #2, I expected the lender to question the upside-down status of House #1 (they can Zillow as well as I can), but they approved the loan with no questions or issues. I was surprised that they didn't even ask how much the new ARM payment on House #1 would be, but was told that they don't take that into consideration. Huh?

As for Big Lender on House #1, I called their loan department to see if I could refinance the mortgages and was told they don't refi homes with negative equity. I asked the loan officer if they have any programs available for people in my situation. He said he didn't know of anything, but that they did have loan counseling people available, but you have to fill out a questionnaire first before they'll talk to you. So I called another 800 number to get the questionnaire and requested it via their automated voice system. That was 2 weeks ago; no questionnaire (not that I have a hardship anyway). Later, buried on Big Lender's website, I saw where they supposedly contact borrowers 4 months before their loan reset, which would be early February. We'll see.

In terms of selling House #1, this is a cookie cutter condo in a town full of them, so it's easy to figure out its market value (zilch) and average days on market (eternity). There are plenty of short sales right here in the neighborhood, and they are not moving.

Finally, I realize my credit score will take a hit, but remember that I don't need to rent since I own House #2. I have stable long-term employment, decent car, and no debt so speak of. So what if my car insurance goes up a bit. Incidentally, the Federal tax-exempt status on mortgage debt forgiveness is only temporary, so if you are considering walking away from your equity-less home, better call your CPA and lawyer to find out the rules and start making plans..."

Thanks, Blue. Your thoughts? Comments? Be respectful, and please don't expect Condoblue to explain every intricate financial detail of these transactions. There's a lot of information here.
Read below for Condoblue's first post.

I am one of these people.  My condo has dropped in value from $520K in 5/06 when I bought it to $350K now. My ARM payment will probably go up $900 per month in June.

"Despite all this, I would be willing to stay if the bank would refi the loans to a 30 year fixed, but since I'm not a 'hardship' case they'd apparently rather foreclose. I guess the only way I could qualify for loan mitigation is to get my boss to fire me, stop making payments, and wreck my credit.  In fact, my bank won't even talk to me until I miss a couple of payments. 

"I have purchased a cheaper place in a nearby area now, while my credit is good, and will stop making payments on house #1 after house #2 closes. I know the foreclosure will be on my credit for 7 years, but I will have saved a lot of money.

"I realize I agreed to the deal when I signed the mortgage papers, but I am within my rights to walk away from a bad deal and suffer the consequences, just as many corporations write down billions of dollars of debt, lose money for their shareholders, and lay off people as a result of their bad decisions. 

"I don't really understand why people view a business decision by a homeowner as a terrible moral lapse. However, when large lending institutions, with access to more sophisticated information than any consumer could imagine, make mistakes affecting thousands of people worldwide, they are not excoriated and vilified with the same righteous zeal."

Comments

[Arti]

You are doing the right thing, for yourself but also for the rest of us.

Those of us who didn't buy into the bubble want to see home prices come back down quickly to where they should be. This can only happen when there are many short sales, and this only happens when people walk away. What we DON'T need is a government doing everything it can to keep people in their unpside down homes, which props up the inflated prices and only slows down the eventual correction.

I repeat: people, stop being idiotic about this being a moral issue, it's all totally LEGAL and you would do the same. In addition, we need these people to WALK AWAY so prices can fall, NOT stay in their inflated homes.

[Keith]

I agree there is no moral issue here, business and financial plans change all the time. There's no reason to hold an individual to some higher personal standard than we hold business entities in general. Condoblue will take an appropriate ding on his credit, but he's not raping society in any way.

[Cal]

I think Condoblue is doing the right thing as long as loan #2 was originated with no fraud as he claims. It would be amazing lax underwriting that they wouldnt ask about home #1, but in a world of amazing lax underwriting nothing would suprise me. Lenders are quite simply reaping what they sowed.

[JohnnyB]

If you spend just a few weeks reading housing market related articles and looking at the summary data from the last 7 years, you cannot help but conclude that the current system is structurally flawed. To the detriment of the vast majority of folks. It’s set up to re-distribute wealth to the upper 1% and keep folks in debt – beyond their means.

As this is one of THE most important quality of life issues for all of us – where we live and at what cost – everyone should take a little time to do some information gathering on their own. It helps put things into a context that might otherwise allude one. The truth and the facts are easily obfuscated.

Industry leaders know most folks are not financially savvy or literate. Folks have hopes and dreams and they can be passionate and emotional about them… this can often lead to what many might consider to be irrational behavior. This gets amplified when the “heard” mentality sets in. Let’s face it… it’s a dog-eat-dog, competitive world. At the least, we all want to survive and provide safety and comfort to ourselves and our loved ones. Beyond that, making money and maintaining or increasing our standard of living is always on most folks minds.

Most folks don’t really know how to go about the latter, so they’re easily manipulated. We’re a “consumer” society, after all.

When we or folks all around us are getting repeatedly screwed and a focused reality of our own situation sets in or even a strong empathy for another’s misfortunes… this can often lead to what many might consider to be actually very rational, self-interested behavior.

When it comes down to personal survival, who can tell another to deliberately sabotage theirs?

The system that created this bubble is currently rigged (most realize this) and condoblue found a loop hole through his own savvy that allowed him to “escape” relatively unscathed. Good for you condoblue.

The ability of someone to “jump ship” like this and then just “jump aboard” another ship just reinforces how **cked up the current mortgage industry is.

[sheila]

this is a little off-topic, but since condoblue mentions it, it is also a good example of how credit score "snapshots" are complete crap, as poor poster "marc" on the previous posting mentions. here's a guy that CLEARLY is going to have a significantly different debt ratio within a few months, the lender (on house 2) knows it, but is able to use his current outlay as a basis.

you can manipulate your score just by not using your "daily" credit card for a month (even if you usually spend $3,000 - $5,000 on it each month) as well. carrying long-term, low interest tax deductible debt dings you as hard as carrying volatile 24% non-deductible credit card balances, too. it takes FOREVER to get your score to move up in a meaningful way, and one late payment to dash it 30 points or more. credit scores are a joke, and this is one more example of why.

meanwhile, marc was intentionally targeted by lenders for a sub-prime ARM (many of which are in the 9% interest range, btw), pays all his bills on time for 3 years (so his score is obviously trending upward), then since ALL OF A SUDDEN, even though they had been shoving money down everyone's throats for 6 years, lenders decided to refuse re-fi loans to EVERYONE with a lowish credit score. At the time he took the loan, Marc had every reason to believe he could re-fi if he could get the original loan, has paid up every month, and the lender is hanging him out to dry based on the arbitrary BS of his credit score, which is better than it was when they gave him the first loan.

everyone was pilling on about how irresponsible he is, but i disagree. he saw an opportunity to pull himself out of poverty by making the type of investment we all want (and which has been an enormous, long-term source of wealth for the middle class for a hundred years), and took it. it's lenders' horrible policies (then and now) including obsession with stupid credit scores which are causing people like him to lost their homes, not his greed or irresponsibility.

[TakeFive]

I was in a similar situation. Bought a condo in 1990 and chased the market down trying to sell. After years (years!) of trying to sell and watching the neighborhood go down, with drug dealers and gang members renting adjacent units, I had enough.

Fortunately I was able to do a short sale with minimal credit damage. Lost my 20% down payment, but that was trivial in comparison to spending years trying to tough out a bad situation. I regret waiting so long, but then it took the banks a while to come to terms with reality and become willing to deal.

Lost my innocence trying to do the honorable thing the last time around. It’s just business to the bank. Angelo’s severance package is proof of that.

[Mike Barker]

I am not a real estate professional nor a lawyer so could "Ann" or someone qualified please confirm or correct my impression of what a "Deed of Trust" is? Is it not true that the reasons we have "Deeds of Trust" instead of "Mortgages" in the west is so that if we do not make our house payments the "trustee" can more easily remove us from the property? And is it also not true that we in the west like "deeds of trust" more than "mortgages" because if we cannot make the payments, we can walk away and the ''trustee" cannot take any other property we own?

If these interpretations are correct, would Condoblue have any obligation to the lender?

[StayClassySanDiego]

I think Condoblue is very brave for sharing his story, especially on this blog.

I really can't blame Condo. I am just continuously surprised at how stupid lenders are. I guess I shouldn't be--I've worked in financial services, and I saw my fair share of idiots.

Most people I know who've had their credit trashed seem to make miracles happen - they obtain credit cards, find employment, and even buy houses. I'm thinking that may change soon. (Recognizing in Condo's case, he/she doesn't need credit for any reason, so it's a non-issue.)

[Monkey Under The GPs Microscope]

Condoblue, don't sweat it. Corporations walk away from projects all the time. I can recall Hamilton Cove condo project on Catalina Island; during the 80's at least 2 companies sunk money into it before walking away when it became financially non-viable.

[RichW]

"At the time I was looking, it was one of the cheapest condos I could find in a decent area."

"I have a good income, credit, and savings, so am qualified to buy House #2"

"but remember that I don't need to rent since I own House #2."

"I don't really understand why people view a business decision by a homeowner as a terrible moral lapse"

Your own words answer your question quite well...

[tony]

I agree with Arti and I have an additional proposal. Not only should people walk away from homes when the loan exceeds the value, I think buyers such as myself, with 100k to put down, credit in the high 700s, making 150k per year, and who still cannot afford to buy a decent house in a falling market, should start making lowball offers based on where we think the market will bottom out. For example, in Sierra Madre, prices are still in the 600 to 700 dollars per square foot range. I'm looking to buy when it drops to 350. All I need is a realtor to start taking these offers to sellers. If enough of us do this, and stand our ground, then maybe prices will come down to income based reality. As far as the economic benefit/cost, lenders lose, consumers win with lower housing costs, and disposable income increases. I'm no economist, but I know that I'd love to have an extra $1000 to spend every month to stimulate the economy. Any realtor interested in presenting lowball offers? Sales commissions on lower selling prices are better than no commissions at all.

[laura l]

I agree that government intervention is not required. Let the invisible hand do what it needs to do and correct the market.

Having written that I have a problem with condoblue for the following reasons:
It is because of condoblue types that real estate prices skyrocketed to unrealistic levels. Condoblue is breaching his contract that shows a lack of character. I wouldn't do the same thing because I wouldn't have bought an obviously overpriced piece of real estate in the first place.

For me personally it doesn't matter that much since the areas I'm interested in are still expensive regardless of this "bubble" or not.

Ultimately banks are run by a bunch of idiots. That is one thing we can all agree on, I would hope. E.g. France's bank losing billions--amazing!

[shockg]

What a slime ball. own up to your obligations dude.

[Timc]

I have to agree that this is not a moral issue and at the end of the day this whole mess needs to be resolved by home prices returning to normal. This can only be achieved by more folks walking away from their massive loans and negative equities. They take the credit hit and hopefully can turn their financial lives back around in the years to come.

I ask this:

Why should I expect someone to be burdened with tens of thousands of dollars in lost equity that they will never get out from under just so I can say I have equity in my home??

I don't expect them to. This whole mess was fueled by greed and speculation. Personally, I thought I would be priced out of the market forever. I am lucky that I bought a very affordable home before the extreme runup. Others are not so lucky, were lied to by RE and loan agents, and had not seen this type of thing before.

My opinion is that this mess will only resolve itself after hitting rock bottom. This was created wealth, easy credit, and now it's payback time. Hopefully our country can learn that what it needs is affordable housing that gains modestly in value, tougher credit and loan standards, and an economy not built around volatile principles and manipulation.

So walk away if you think that will be better for you personally in the long run. You owe these banks that sold us out NOTHING.

[AK]

Smart business decision and more power to you. After all, we live in the great US of A where capitalism is in full force - the survival of the fittest. Those "big" corporations, when they lose money and need to start to cut costs, the first thing they do is start laying off people. So anyone who tries to think that Condoblue is being immoral by walking away, think again.

[mike]

why don't you rent that first house? one day-and it may be 2 years or 10 years- from now you will say what everyone says...BOY I WISH I HAD HELD ON TO THAT ONE. i own 4 rental properties and the only houses i am upset with are the ones that i sold!!!!!!! i would have been furious if i had just walked away. one more thing. your story doesn't wash . if you had such great credit and income you would be horrified at losing it and you would (or should) know the value of holding real estate as a long term asset. i personally don't buy all of your story.

[BigD]

I wouldn't ruin my credit for this....

[Dave P]

CondoBlue, none of what you added suddenly makes you a good guy. You could have put money down on #1 but didn't. Could have taken a fixed but decided to gamble. These are choices you made yourself, so you of all people can't blame the market of the lender for your situation. Many others took 100% ARMs because that was the only way they could get in. They aren't any better but at least if they had the means you claim to have they may have made better decisions.

Here's the thing: when you signed your loan papers there was no provision that you would bail on the contract if the market tanked and your house was upside down. You didn't inform the lender that your word wasn't worth anything if suddenly you weren't going to realizing 15% gains yearly. It would be like getting married and saying that you will bail on your wife the first time some hot young thang looks your way.

Plus you haven't seemed to learn. In this declining market, you elected to buy ANOTHER house. If the value goes down 30% from your purchase price, are you going to walk away again? When does your word mean something?

p.s. If things had gone in your favor with house #1 and you saw double digit appreciation, where you going to call your loan servicer and ask to renegotiate the terms of your contract in THIER favor? People kill me when they want to keep all the gains but share or pass off all the losses.

[Ed]

You just reaffirmed my original feelings. You're a deadbeat. But sure, as Arti says, you're doing the right thing because many people have no moral conscience anyway. If your situation was similar to the lady who was walking away from her loan because she lost her job, had kids to feed, etc., I can understand it and they have all the sympathy I can muster. But you're saying you have money in the bank, a job, good credit.......naw, I don't buy it. Rationalize it with all the comments that were made about it being a legal issue vs. a moral issue, big business being crooks, politicians, "Bushco," Iraq, Afganistan, blah blah blah, but it comes down to the same thing: You have zero integrity. Hmmm..........I wonder what your real name is. Seems I had a friend once just like you.

[Keith]

You are doing the right thing. People need to remember that the corporations and hedge funds do not have any honor or moral obligation when it comes to holding borrowers to their contracts. Borrowers should not have any qualms about using that same contract to their favor. These industries spend millions lobbying congress to prevent consumer protection regulations from denting their profits. They say the market is efficient, and the market will take care of any problems that arise. Well, there is no solution more capitalistic and market based than two parties adhering to a contract.

And in case you were in doubt about your decision, I have a link on my blog to a video of Jim Cramer telling people to walk. Of course, agreeing with Jim Cramer may not make you feel better.

Enjoy your new home!

[Jlee]

It's also totally a finanical issue. People walking away from homes, and foreclosures in general hurt the value of people who actually bought what they could afford. I bought mid bubble, and am doing fine. Of course, I will have to stay in my house until the market recovers, which will take longer the more these "financial genius'" don't live up to their obligations. The reason there is a business to lend you money in the first place is because people before lived up to their obligations. It's all about ME, ME, ME. Our society is doomed.

[Rip N Tear!!!]

CONDOBLUE!!!!!! Nice work......I have a friend who just handed the keys back to the bank.

The system needs to COLLAPSE to become stable, injecting money into the system, only delays the crash AND the "stable" recovery, so my opinion is... ... If you are 50, 100, 150K upside down, give the keys back let your credit take a hit for awhile, you will be better off in the long run, and the bank will survive, Im sure....

SCREW THE BANK.......they saw this coming LONG before you did. Trust me, you paid for the Ferarri in the CEO's garage a long time ago.

[Nancy]

Walking away from Home #1 is one thing. Selfishly buying another - which will probably lose its value as well - is another!

[anon]

Capitalism without recourse to bankruptcy cannot work.

Are the people here who have some weird problem with what condoblue is doing advocating that we change to a Socialist or Communist system where the government forbids us from risking too much capital through tight, tight governmental controls?

Or are you advocating a return to some sort of Feudalism where the common man, who makes a financial mistake, for whatever reason, must be buried under that mistake for the rest of his life?

You're advocating a return to serfdom if that's what you want.

The ability to walk away from debt is absolutely integral to Capitalism.

There is NO Capitalism without some ability to walk away from debt and start over.

Period.

End of story.

[l.a.guy]

Everyone is focusing on CondoBlue but the bank is just as much to blame as he is. As others noted in yesterdays post, California has no-recourse loans for a reason.
(http://en.wikipedia.org/wiki/Nonrecourse_debt )
By definition the borrowers liability is limited to the property put up as collateral. The beauty of this system is that it is in the interest of both the lender and borrower to make sure the loan is equitable. If the bank does proper due diligence and insists on a reasonable LTV to insulate them from loss then they have nothing to fear. The only reason the bank will lose money on CondoBlue is because they ignored adhering to sensible lending requirements at their own peril.

CondoBlue's deal was either I'll pay you or give you back the property. He's giving back the property. The fact that the bank put them selves at risk has nothing to do with CondoBlue.